Use It or Lose It: Efficiency Gains from Wealth Taxation
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Wealth tax could enhance risk-seeking equity by reallocating capital to higher productivity activities, boosting average lifetime utility by 7.5% in consumption-equivalent terms.
The new Guvenen paper the economist wrote up, it suggests that a wealth tax could create more risk seeking equity by shifting capital to higher productivity activities
"...How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms).....To see some of the implications for taxation, consider the following stark but illustrative example. Two entrepreneurs start out with the same wealth level—say $1,000 each—but earn different returns on their wealth, say, r1 = 0 and r2 = 20%: Under capital income taxation, the unproductive (first) entrepreneur will escape taxation because he generates no income, and the tax burden will fall entirely on the more productive (second) entrepreneur because he generates positive capital income. Under wealth taxation, on the other hand, both entrepreneurs will pay the same amount of tax regardless of their productivity, which will expand the tax base, shift the tax burden toward the unproductive entrepreneur, and reduce (potential) tax distortions on the productive entrepreneur. To the extent that these differences in productivity are persistent, a wealth tax will gradually prune the wealth of idle entrepreneurs and boost that of successful ones, leading to a more efficient allocation of the aggregate capital stock, in turn raising productivity and output. In this sense, wealth taxation has a “use it or lose it” effect that is not present in capital income taxation.....Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality....."
Fatih Guvenen, Gueorgui Kambourov, Burhanettin Kuruscu, Sergio Ocampo-Diaz, Daphne Chen, "Use It or Lose It: Efficiency Gains from Wealth Taxation," National Bureau of Economic Research, September 2019, https://www.nber.org/papers/w26284